Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

When it comes to the $162 billion that large banks have spent to resolve legal troubles since the financial crisis, the $4 million hit that Wells Fargo took last month for its student-loan servicing practices seems almost irrelevant by comparison.  

But the fallout may be causing more damage than what might otherwise be expected from what is essentially a parking ticket on top of Wells Fargo's estimated pile of $16 billion in legal expenses since 2008. The bank's partnership with Amazon.com to offer a "discount" on student loans was throttled in the cradle just six weeks after it was announced, as Shahien Nasiripour reported.
 

Legal League Table
The top U.S. banks have paid more than $162 billion in legal expenses and mortgage repurchases since the financial crisis
Source: Bloomberg Intelligence
Note: Wells Fargo litigation expense estimated as sum of settlements

Neither side gave a reason for ending the project, but I'd bet you lunch at the college cafeteria of your choice that Amazon wasn't too thrilled about the Consumer Financial Protection Bureau's action against the bank or the din of complaints that the partnership was trying to sucker students into taking out private loans that carried much higher interest rates than those offered by the federal government.

As the Institute for College Access & Success described the partnership, which offered to shave half a percentage point off higher-education loans for members of Amazon's Prime Student program: "It is a cynical attempt to dupe current students who are eligible for federal students loans with a record low 3.76 percent fixed interest rate into taking out costly private loans with interest rates currently as high as 13.74 percent."

For Amazon, it's a lesson that dipping its toes into the highly regulated, highly scrutinized and highly criticized world of financial services is wrought with much more peril than offering college kids back-to-school deals on toothbrushes and towels. 

For Wells Fargo, it's a lesson that with U.S. educational debt balances climbing into the neighborhood of $1.3 trillion, and the word "bubble" following the words "student loan" with alarming frequency, the hunt is on for villains. So maybe it's time to tone down the boast about being "the nation’s largest private student lender among U.S. commercial banks."

Major in Debt
Outstanding student-loan balances have surged to almost $1.3 trillion
Source: Federal Reserve Bank of New York via Bloomberg

And for students, the implied lesson is that Wells Fargo is a bunch of scam artists trying to rip them off on loans to pay for college or graduate school. 

But is that last part fair? Well, not really. 

It's true that the rates Wells Fargo advertises for student loans are much higher (as high as 10.93 percent) than the going rate of 3.76 percent for a federal loan. But they seem competitive with other student lenders like Discover, whose fixed rates go as high as 11.49 percent. The infractions in servicing outlined by the CFPB are worth noting, but these sins seem rather venial considering only $410,000 in refunds is being demanded. 

And the argument that Wells and Amazon were trying to "dupe" students into more expensive loans seems like a bit of a stretch. That's because if you are looking into taking on tens of thousands of dollars of debt to pay for higher education, and Amazon is the first and last place you shop for loans, well let's just say I worry about what sort of GPA you'll be bringing home at winter break.    

The low rates offered on federal student loans are not exactly a secret and should be immediately obvious to any student or parent who spends even a few minutes examining their options with a guidance counselor or Google. 

The first tip offered by any adviser worth his or her salt will be to fill out the Free Application for Federal Student Aid (or FAFSA) to determine eligibility for government aid and loans. Private loans from banks like Wells Fargo should be considered only if the money from the feds and your nest egg doesn't cover everything. 

Surely those scoundrels at Wells Fargo must have conspired to hide FAFSA from potential customers, right? Not at all. It may not have been mentioned in the Amazon promotions, but throughout the content on the bank's website concerning its student-loan products, federal loans and the FAFSA process are highlighted repeatedly as the first step, whether you are reading the bank's college-planning blog, watching the videos on its website or on YouTube or downloading a PDF file. 

The real lesson then should be that the key to success in picking out the right higher-education loans is exactly the same as the key to success in higher education itself: Don't skip the required reading. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net